Private Company RPT Materiality: Section 188 Thresholds & Form AOC-2 Disclosure

What is “Material” for Related Party Transactions of a Private Company? Decoding Section 188, Rule 15 and Form AOC-2

Summary: The word “materiality” sits at the centre of one of the most persistent points of confusion in related-party-transaction (“RPT”) compliance for private companies. Section 188 and Rule 15 related-party transaction framework Section 188 of the Companies Act, 2013 (“the Act”) read with Rule 15 of the Companies (Meetings of Board and its Powers) Rules, 2014 (“Rule 15”) fixes precise, quantified thresholds — but those thresholds answer only one question: whether a related party transaction that fails both the “ordinary course of business” test and the “arm’s length” test has crossed a line that requires prior shareholder approval by ordinary resolution. That is a wholly different question from the one a practitioner actually faces while preparing Form AOC-2 — namely, which contracts entered into at arm’s length, in the ordinary course of business, are “material” enough to be disclosed in Part 2 of that form. The Act and the rules made under it do not define “materiality” for this second purpose in relation to a private company (or, for that matter, any unlisted company). That word is defined, and defined only, for listed entities, under Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”). Related Party Transactions under Companies Act and SEBI LODR For a private company, materiality for Form AOC-2 is therefore a matter of the Board’s own reasoned judgment — best anchored by a written, Board-approved policy — and not something that can be read off Rule 15(3) by assumption.

Applicable Legal Provisions

• Section 188(1), Companies Act, 2013 — requires prior consent of the Board of Directors, by resolution at a Board meeting, before a company enters into specified categories of contracts or arrangements with a related party.
• First proviso to Section 188(1) — requires prior approval of the company by ordinary resolution where the transaction value crosses the thresholds prescribed under Rule 15(3).
• Second proviso to Section 188(1) — bars a related-party member from voting on the resolution approving the transaction (exempted for private companies — see Exemptions below).
• Third/fourth proviso to Section 188(1) — excludes transactions entered into in the ordinary course of business and on an arm’s length basis from the Board/shareholder approval requirement altogether.
• Rule 15(3), Companies (Meetings of Board and its Powers) Rules, 2014 — prescribes the monetary thresholds referred to in the first proviso to Section 188(1).
• Section 2(76), Companies Act, 2013 — defines “related party.”
• Section 134(3)(h), Companies Act, 2013 — requires the Board’s Report to contain particulars of every contract or arrangement referred to in Section 188(1), in Form AOC-2.
• Rule 8(2), Companies (Accounts) Rules, 2014 — the rule under which Form AOC-2 is prescribed.
• Form AOC-2 — the prescribed form itself, in two parts: Part 1 for contracts not at arm’s length (no materiality qualifier), and Part 2 for “material” contracts at arm’s length in the ordinary course of business.
• MCA Notification G.S.R. 464(E) dated 5 June 2015 (as amended by G.S.R. 583(E) dated 13 June 2017) — exempts private companies from parts of Section 188 (discussed under Exemptions below).
• Regulation 23, SEBI LODR Regulations, 2015 — defines “materiality” for related party transactions, but only for listed entities; referenced here purely for contrast.
• Section 134(8), Companies Act, 2013 — penalty for contravention of Section 134, including defects in Board’s Report disclosures such as Form AOC-2.
• Section 188(5), Companies Act, 2013 — penalty for contravention of Section 188 itself.

Relevant Extracts

Third proviso to Section 188(1) (simplified): nothing in this sub-section shall apply to transactions entered into by the company in its ordinary course of business, other than transactions which are not on an arm’s length basis.

Section 134(3)(h) (simplified): the Board’s Report shall contain particulars of every contract or arrangement with related parties referred to in Section 188(1), in Form AOC-2, along with justification for entering into it.

Form AOC-2, Part 2 heading (as prescribed under Rule 8(2)): “Details of material contracts or arrangement or transactions at arm’s length basis.” Neither the Act, nor Rule 8(2), nor any circular defines what “material” means for this purpose in the case of an unlisted company.

Legal Position

RPT compliance for a private company runs on two separate tracks, and the confusion Divesh flags arises almost entirely from treating them as one.

Track One — The Approval Track

Track one — the approval track. Every related party transaction falling within Section 188(1)(a) to (g) first needs Board consent by resolution at a Board meeting. If the transaction also fails the ordinary-course-and-arm’s-length test, and its value crosses the Rule 15(3) threshold for that category, it additionally needs prior approval of the members by ordinary resolution. This is the only place in the RPT framework where a quantified number appears in the Act or Rules for a private company, and it exists purely to decide when a member vote is triggered.

Related Party Transactions of Unlisted Companies

Rule 15(3) currently prescribes the following thresholds (turnover and net worth are taken from the audited financial statements of the immediately preceding financial year):

Track Two — The Disclosure Track

Track two — the disclosure track. Independently of whether Board or shareholder approval was needed, Section 134(3)(h) requires the Board’s Report to carry particulars of contracts “referred to in sub-section (1) of section 188” in Form AOC-2. Board’s Report and Form AOC-2 compliance Form AOC-2 itself — not the Act, not Rule 8(2) — splits this into Part 1 (contracts not at arm’s length, to be disclosed without any materiality filter) and Part 2 (contracts at arm’s length in the ordinary course of business, to be disclosed only if “material”). The word “material” appears for the first time in the form itself. Neither the Act nor the Accounts Rules defines it for a private or otherwise unlisted company. The only place the word is defined in Indian company law is Regulation 23 of the SEBI LODR, and that Regulation, in terms, applies only to listed entities.

Reading the two tracks together corrects the natural but mistaken assumption that Rule 15(3) also supplies the Form AOC-2 materiality threshold. Rule 15(3) was drafted to answer “does this non-arm’s-length or non-ordinary-course transaction need a shareholder vote” — a question that, by definition, never arises for a Part 2 transaction, because Part 2 exists only for transactions that are already at arm’s length and in the ordinary course of business. Applying a threshold designed for one question to answer a completely different question is a convenient shortcut, not a legal requirement.

Exemptions/Relaxations for Private Companies

The MCA notification dated 5 June 2015 (as amended on 13 June 2017) grants private companies two specific reliefs under Section 188, and it is important to be precise about how far they go:

• Group-company carve-out: for a private company, the entities covered by Section 2(76)(viii) — i.e. a holding, subsidiary or associate company, or a fellow subsidiary — are excluded from the definition of “related party” for Section 188 purposes. A transaction with such an entity is not a Section 188 related party transaction at all, and therefore needs neither Board nor shareholder consent under this section.
• Voting relaxation: the second proviso to Section 188(1), which bars an interested member from voting, does not apply to private companies. An interested related-party member may vote on the ordinary resolution approving the transaction.

Neither relaxation touches Section 134(3)(h) or Form AOC-2. The Board’s Report disclosure obligation — including the undefined “material” judgment call for Part 2 — applies to a private company exactly as it applies to any other company, subject only to the point above that group-company transactions are not “related party transactions” under Section 188 in the first place, and so do not enter the Form AOC-2 exercise at all. No exemption notification issued for Section 8 companies, Small Companies, OPCs or Specified IFSC companies defines or relaxes the Form AOC-2 materiality threshold either; the gap is universal across every class of unlisted company, not specific to private companies.

Professional Interpretation

No NCLT, NCLAT or High Court ruling has settled what “material” means in Form AOC-2 Part 2 for an unlisted company, and none should be assumed or cited as if one exists. The ICSI Guidance Note on Related Party Transactions offers detailed, useful commentary on how to test whether a transaction is in the “ordinary course of business” and at “arm’s length,” but it does not purport to fix a numerical or qualitative materiality threshold for Form AOC-2 Part 2 disclosure either — which itself confirms that the gap Divesh has identified is real and not merely an oversight in secondary literature.

Practical Interpretation

In the absence of a statutory yardstick, professional practice has settled into two broad approaches, and a private company’s Board (guided by its practising company secretary) should consciously choose one rather than default into inconsistency from year to year:

• Policy-anchored approach (recommended): the Board formally adopts a written RPT disclosure/materiality policy for Form AOC-2 purposes, fixing a threshold in absolute rupee terms and/or as a percentage of turnover or net worth. Many companies choose to mirror the Rule 15(3) percentages for convenience and internal consistency — there is nothing wrong with doing so — but this should be recorded as a considered Board decision, not asserted as a legal requirement borrowed automatically from Rule 15(3).
• Disclose-more-than-less approach: where no policy exists, the safer default — given that no statutory floor protects an omission — is to disclose an arm’s length ordinary-course transaction in Part 2 of Form AOC-2 if there is any reasonable doubt about its materiality, particularly where the related party is a director, promoter, or their close relative, since qualitative sensitivity (who the counterparty is) matters as much as quantitative size in the general concept of materiality used in financial reporting.

The penalty exposure reinforces the conservative approach. A defect in the Board’s Report, including an incomplete Form AOC-2, attracts a penalty under Section 134(8) of ₹3,00,000 for the company and ₹50,000 for every officer in default — the current, decriminalised position under the Companies (Amendment) Act, 2020, with no imprisonment. MCA penalty for Board Report non-compliance under Section 134(8) This is distinct from Section 188(5), which penalises a director or employee who enters into or authorises a related party transaction without the Section 188 approvals actually required (₹5,00,000 for a company other than a listed company; ₹25,00,000 for a listed company) — a different trigger altogether, since a Part 2 transaction, being ordinary-course and arm’s length, never needed that approval in the first place. Divesh should verify both figures against the current Act before quoting them in an opinion, given how frequently penalty quanta have been revised since 2018.

As a point of comparison only — not as a source private companies can borrow from — SEBI has itself moved away from a flat materiality threshold for listed entities. Effective December 2025, Regulation 23 of the SEBI LODR replaced the earlier flat threshold (the lower of ₹1,000 crore or 10% of annual consolidated turnover) with a graded, turnover-linked scale, capped at ₹5,000 crore for the largest listed entities. Turnover-Linked RPT Thresholds: SEBI Simplifies Rules for Listed Companies This confirms that even where materiality is defined, the definition itself is a policy choice recalibrated over time — reinforcing why a private company should treat its own materiality threshold as a considered Board policy rather than a fixed number copied from another regime.

Example

XYZ Private Limited has a turnover of ₹40 crore and a net worth of ₹10 crore for the preceding financial year. During the year, it enters into two transactions with related parties: (a) purchase of raw material worth ₹2 crore from a proprietorship firm of one of its directors, at prevailing market price; and (b) a one-time website redesign fee of ₹3 lakh paid to a director’s relative, again at market rates. Both are in the ordinary course of business and at arm’s length, so neither needs Board or shareholder consent under Section 188 — transaction (a) is, in any event, well under the 10%-of-turnover threshold (₹4 crore) that Rule 15(3) would apply if the ordinary-course/arm’s-length exception did not apply. Both transactions are still “contracts… referred to in sub-section (1) of section 188” and therefore fall to be considered for Part 2 of Form AOC-2. If XYZ Private Limited has a Board-approved policy treating transactions above ₹1 crore as material, transaction (a) is disclosed and transaction (b) is not. In the absence of such a policy, the Board must exercise its own judgment — and, given the identity of the counterparties, the defensible course is to disclose both.

Conclusion

Divesh’s reading is correct, and it is worth stating as the firm’s settled position: materiality for related party transactions is not defined under the Companies Act, 2013 for any company other than a listed entity, and the Rule 15(3) thresholds under Section 188 answer an entirely different question — whether shareholder approval is needed for a non-arm’s-length or non-ordinary-course transaction — from the “material” qualifier used in Part 2 of Form AOC-2 for arm’s length, ordinary-course contracts. For a private company, the professionally sound approach is twofold: apply Rule 15(3) strictly, and only for its actual purpose of triggering shareholder approval; and separately adopt, or advise the client to adopt, a written Board-approved RPT disclosure policy that fixes a reasoned materiality threshold for Form AOC-2 Part 2, defaulting to disclosure over omission wherever that policy is silent or the transaction is qualitatively sensitive.

FAQs

Q1. Can we simply use the Rule 15(3) limits as the Form AOC-2 materiality threshold?

Yes, as a matter of internal Board policy and by analogy — many private companies do this for consistency and ease of application. But it is a voluntary professional choice, not a statutory requirement, and should be minuted as a considered Board decision rather than treated as legally mandated.

Q2. Must a private company file Form AOC-2 even if every related party transaction is exempt under the third proviso to Section 188(1)?

Yes. Form AOC-2 is a Board’s-Report disclosure required under Section 134(3)(h), independent of whether Board or shareholder approval was needed under Section 188. Even a “NIL” position is customarily confirmed in the Board’s Report rather than left silent.

Q3. Does the private-company exemption notification dated 5 June 2015 touch Form AOC-2 at all?

No. That notification relaxes only two aspects of Section 188 itself — excluding group-company transactions from the “related party” definition, and permitting interested members to vote. It says nothing about Section 134(3)(h) or Form AOC-2, so the Board’s-Report disclosure obligation, including the undefined materiality judgment for Part 2, remains fully applicable to private companies. [Exemptions to Private Companies under Section 462]

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [[email protected]](mailto:[email protected])).